Debt Crisis: Why the Worst Is Yet to Come

I know it is borrowing stuff…government statistics and projections. But it’s important for my readers to see how out-of-control the debt crisis in America is. Eventually, the day of reckoning will come when the homemade debt crisis will affect the stock market, the economy and, of course, our investments and businesses.

Most forecasts now have the U.S. government deficit for the current fiscal year pegged at $1.6 trillion, about $200 billion more than the Obama Administration has previously forecast.

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The White House expects the annual deficit to fall to $1.1 trillion next year and $607 billion by 2015.

Last year, the interest on the national debt came in at about $200 billion amid interest rates that were record-low. But rates are rising and they are rising fast. I’m expecting the yield on the bellwether U.S. 10-year Treasury to smash past four percent soon. That means the interest the government expends on its debt could jump to more than $500 billion annually in the next few years as interest rates rise.

By mid-decade, we will be spending almost $1.5 billion a day on interest expenses related to the national debt. That’s if all goes well. It’s not taking into account runaway inflation; it’s not taking into account interest rates rising sharply to support the ailing greenback.

The amount of our public debt held by foreigners has declined approximately 10% over the past two years. Either we need to get more domestic investors to buy government debt or we have to lure the foreigners back as buyers of our debt. Either way, the only way to do it is that interest rates must rise, the national debt must rise. It’s a national debt crisis that gets far too little coverage from the media and the public.

Interest rate cycles are very long-term in nature, usually 25 to 30 years in length. The yield on the U.S. 10-Year Treasury rose from about 2.5% in the early 1950s to about 15% in the early 1980s—a 30-year trend of rising interest rates. From the early 1980s to last year, the yield on the 10-Year Treasury fell from 15% to 2.4%—a 30-year trend of interest rates falling.

I believe that we are on the cusp of a new long-term trend of rising interest rates. No one in the 1950s, 1960s or 1970s would have ever believed that interest rates would go to 15%...and they did. Ask around today. If you tell the average investor that interest rates are headed to 10% within 10 years, they will laugh and say, “Can’t be possible.” And that’s why it’s going to happen.

The worst of the debt crisis is yet to come. Investors should be reviewing their portfolios, their investments, to prepare for the effects of sharply higher interest rates.

Michael’s Personal Notes:

Something historic happened this morning…

Japan confirmed that China had surpassed it as the world’s second largest economy in 2010.

The growth is staggering. In the year 2000, the total GDP of China was a paltry $1.2 trillion, about 12% of U.S. GDP that year. Fast-forward to 2010 and China’s GDP was $5.88 trillion last year, about 40% of U.S. GDP.

Will China be able to keep up this unprecedented annual growth without some form of social upheaval? Can growth be that organized? I have my doubts. But we can’t argue with the facts.

If China keeps growing the next 10 years like it has the last 10 years, by the end of this decade, China’s economy will be equal to about 70% of the U.S. economy. The writing is on the wall. The balance of economic power is slated to shift from the West to Asia over the next 10 to 15 years.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average starts this week up an even six percent for 2011.

I believe that the bear market rally in stocks has more immediate-term gain left on the upside. Shorter-term, over the next two to four months, I see trouble for the stock market, as interest rates rise in an environment of ever increasing bullishness. Hence, why I’ve been turning bearish for the remainder of 2011.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007. The index fell to 6,440 by March 2009.
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